UK Property News
Can Further Interest Rate Cuts Bridge the £3bn Equity Gap in UK Property?
High interest rates cut commercial real estate lending by 33%, hitting a 2013 low
David Hannah, Group Chairman of Cornerstone Tax, explains why additional interest rate cuts are crucial for revitalising the UK's housing sector
Property investors in the UK are facing a severe liquidity crunch, primarily due to high interest rates that require larger equity contributions for debt-related deals. According to the latest report from Bayes Business School, these elevated rates have led to a 33% drop in commercial real estate lending, the lowest level since 2013. With interest rates at 5%, borrowing £1 million now incurs an extra £50,000 per year in development and bridging finance costs to secure properties at previous prices. This has resulted in an equity gap exceeding £3 billion in the UK property market, significantly affecting commercial real estate transactions. In light of this, David Hannah, Group Chairman of Cornerstone Tax, argues that additional interest rate cuts are crucial for boosting the UK's lacklustre property sector.
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"A £3 billion equity gap nows exists within the UK property market and has significantly slowed commercial real estate (CRE) transactions."
David Hannah
Unlike a credit crunch which involves a reduction in credit availability, a liquidity crunch happens when investors and developers have a shortage of cash, despite the credit being attainable. This is further increased by a sluggish property market, long transaction cycles, and rising living costs, with high interest rates being the contributing factor. This gap has significantly slowed commercial real estate (CRE) transactions and made the UK an unappetising place to invest.
The ongoing liquidity crunch is halting developers' ability to use equity for new projects, adversely affecting their businesses and whilst the decision from the BoE came as welcome to those within Britain’s property market, David holds that more can still be done to stimulate the sector. By urging the monetary policy committee to aim for a 3-3.5% base rate, this will stimulate private development, incentivise first-time buyers and restart the private rental sector.
David Hannah, Group Chairman of Cornerstone Tax, comments:
Since the Bank of England 's consecutive decisions to raise the interest rate to 5.25%, we’ve witnessed chaos in the UK's housing market. A £3 billion equity gap nows exists within the UK property market and has significantly slowed commercial real estate (CRE) transactions. Additionally, a record number of landlords have exited the private rental sector, contributing to higher prices for tenants who once aspired to take their first step on the property ladder.
“I’d urge the MPC to continue this momentum by considering another interest rate cut in their next meeting, even a reduction by a quarter percentage point would signal further optimism within the UK economy. A target base rate of 3-3.5% should be the overall goal if the BoE want to truly prioritise prospective buyers and help reduce the UK's current liquidity crunch.”
David Hannah, Group Chairman
